Category: Market Action

He who pays the piper …:

Euro-area leaders rebuffed Irish Prime Minister Enda Kenny’s bid for easier bailout terms, demanding that Ireland raise tax rates in return, as they rewarded Greece with a cut in its rescue-loan costs.

“We weren’t really satisfied yet today with what Ireland pledged,” German Chancellor Angela Merkel said after a summit that ended about 1:30 a.m. in Brussels. “We can only offer the interest-rate cut when we have something in return.”

Kenny, arriving for his first summit as Ireland’s leader, refused to buckle under pressure from Merkel and French President Nicolas Sarkozy as he pushed for relief on the 5.8 percent interest rate the country pays on the 85 billion-euro ($115 billion) rescue package it received in November.
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Ireland’s main corporate tax rate is 12.5 percent, compared with an EU average of about 23 percent and even higher rates in Germany and France, which it has used to lure companies such as Hewlett-Packard Co. to set up in the country.

“We’re not asking Ireland to put up their corporate taxes to the European average, but to make some effort,” Sarkozy said.

As for Greece, which now pays about 5 percent on loans in its 110 billion-euro rescue program, euro-area leaders agreed to cuts the rate by 1 percentage point and extend the maturity to 7 ½ from three years.

Greece has made major efforts, just look at the size of their privatization program,” Sarkozy said. “But you can’t ask others to contribute for you, when you won’t make an effort on your tax receipts.”

Remember the collateralization spread from the credit crunch, that meant that bonds that could be pledged to the central bank traded at a premium to bonds that couldn’t? This spread now has an Australian cousin:

Sales of bonds by top-rated overseas borrowers in Australia have evaporated following a record start to 2011 after the nation’s banking regulator ruled they don’t qualify under new international capital rules.

The World Bank, Germany’s Kreditanstalt fuer Wiederaufbau and other supranational and agency issuers have avoided the kangaroo bond market since the Australian Prudential Regulation Authority said Feb. 28 their notes can’t be considered liquid assets under Basel Committee on Banking Supervision rules. The AAA rated securities represented 27 percent of new bond sales in Australia in 2010, according to data compiled by Bloomberg.

APRA’s decision spurred the nation’s banks to purchase federal and state government securities that do qualify, pushing Australian sovereign yields to the lowest in two months. The 10- year government bond has fallen 5 basis points since the guidelines were announced, while the extra yield investors demand to own New South Wales state debt instead of government notes is at a record low.

Americans are shocked by high dairy prices:

Cheddar cheese in supermarkets averaged $5.143 a pound in January, the highest since at least 1984, while a half gallon of ice cream sold for $4.74, the most since 1980, according to data collected from about 26,000 retailers by the Bureau of Labor Statistics. Retail whole milk averaged $3.301 a gallon, 2 percent more than a year earlier.

We should be so lucky.

There was a downdraft in the Canadian preferred share market today, with PerpetualDiscounts down 9bp, FixedResets losing 7bp and DeemedRetractibles dropping 13bp. Volume returned to average levels.

Spain got downgraded:

The downgrade of Spain’s debt only one day after Portuguese bond yields hit record highs is putting extra pressure on euro zone leaders to find a solution to the resurgent euro zone debt crisis.

Moody’s, the credit ratings agency, downgraded Spain’s sovereign debt by one notch, to Aa2. While the move was expected – Moody’s signalled in December that it would probably lower Spain’s rating – the Spanish government and some economists said it was unwarranted because of the progress the country has made in reducing its deficit and recapitalizing its banks.

There is some kind of push going on to increase regulation:

In a report issued Thursday, the Mutual Fund Dealers Association of Canada (MFDA) recommended securities commissions expand protection for investors because the two key funds – the Investor Protection Corp. for mutual fund clients, and the Canadian Investor Protection Fund for brokerage industry clients – have significant gaps.

Both funds protect investors’ assets up to coverage limits in the event that financial firms go bankrupt.

But failed investment firms such as Portus Alternative Asset Management Inc. and Norshield Asset Management (Canada) Ltd. were not licensed as mutual fund dealers, which are covered by the IPF. Rather, they were licensed as portfolio and mutual fund managers, which are not covered at all, the report notes.

The MFDA recommends that both the fund manager and portfolio manager categories of firms be required to join either the IPC or the CIPF to ensure seamless coverage.
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A spokeswoman for the Ontario Securities Commission said its staff do not agree that there are gaps in the regulation and oversight of fund managers and portfolio managers. “While mutual fund assets are not held at mutual fund dealers, these assets are held at qualified custodians which are IIROC members or Canadian financial institutions, such as banks,” Susan Silma said in an e-mail statement.

Last month, the Canadian Foundation for Advancement of Investor Rights issued a report looking at the country’s worst financial frauds. It called for all regulated firms – including portfolio managers and fund managers – to become members of a self-regulatory organization so they would be subject to more oversight and their clients would be covered by investor protection funds.

The MFDA report was written in 2008 at the request of the Canadian Securities Administrators (CSA), an umbrella organization of provincial securities commissions, but was not released publicly until now. It was prepared as part of a project to examine regulatory gaps in Canada.

I haven’t looked into this much – it sounds like just another way for the big players to ensure the cost of entry into the business is increased as much as possible.

Spanish banks need money:

Spanish banks that together need as much as 15.2 billion euros ($21 billion) to meet minimum capital levels now must persuade investors that their battered balance sheets offer the potential return to match the risk.

Twelve lenders, including eight savings banks and the Spanish units of Deutsche Bank AG (DBK) and Barclays Plc (BARC), are among the lenders that fell short of government-set capital requirements, the Bank of Spain said yesterday. The institutions whose levels are furthest from the required minimums include Bankia, which needs 5.8 billion euros, Novacaixagalicia, which requires 2.6 billion euros, CatalunyaCaixa and Unnim.

Yesterday’s announcement sets in motion a timetable that gives lenders as long as a year to raise funds or risk being taken over by a government bailout fund. Investors may be skeptical that the Bank of Spain’s estimates of how much capital the banks need fully reflect losses hidden on balance sheets, putting the onus on them find investors quickly, said Inigo Lecubarri, a fund manager at Abaco Financials Fund in London.

BIS has released a working paper by Ugo Albertazzi, Ginette Eramo, Leonardo Gambacorta and Carmelo Salleo titled Securitization is not that evil after all:

A growing number of studies on the US subprime market indicate that, due to asymmetric information, credit risk transfer activities have perverse effects on banks’ lending standards. We investigate a large part of the market for securitized assets (“prime mortgages”) in Italy, a country with a regulatory framework analogous to the one prevalent in Europe. Information on over a million mortgages consists of loan-level variables, characteristics of the originating bank and, most importantly, contractual features of the securitization deal, including the seniority structure of the ABSs issued by the Special Purpose Vehicle and the amount retained by the originator. We borrow a robust way to test for the effects of asymmetric information from the empirical contract theory literature (Chiappori and Salanié, 2000). Overall, our evidence suggests that banks can effectively counter the negative effects of asymmetric information in the securitization market by selling less opaque loans, using signaling devices (i.e. retaining a share of the equity tranche of the ABSs issued by the SPV) and building up a reputation for not undermining their own lending standards.

OSFI has released its newsletter Pillar, Winter 2011. Nothing new or interesting.

A gloomy day for the Canadian preferred share market, with PerpetualDiscounts down 25bp, FixedResets losing 19bp and DeemedRetractibles getting off lightly with a loss of 7bp. Volume was high.

More kerfuffle over the TMX / LSE merger:

Speaking to provincial legislators on Thursday, Howard Wetston, chairman of the Ontario Securities Commission, said the final decision will hinge on whether the controversial $3.1-billion deal is in the public interest.

Mr. Wetston said the OSC would “resist any watering down or diminution” of its responsibility over the Toronto Stock Exchange and that concerns around the impact of the merger on corporate governance are also “very relevant.”
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In a two-page open letter, [TMX CEO] Mr. [Tom] Kloet restated his position that the merger would occur at the holding company level, and the TSX would continue to exist as a stand-alone operation with regulatory oversight remaining intact.

“It really is that simple — no foreign regulator, including the U.K. Financial Services Authority, will have any regulatory powers or influence over any of our Canadian exchanges, entities or issuers,” he wrote in the statement.

The Financial Post has published the full letter. It also excerpted remarks by Barbara Stymiest that I didn’t consider too impressive.

As for me … well, first off, I think the question that’s being asked is upside down. Government should only consider interfering if the transaction can be shown to be a net negative for Canada – if then – rather than the onus being on the transactors to show a net benefit. Whose business is it, anyway?

Secondly, I think that an underlying question is the power of the banks in the Canadian financial marketplace, which is basically total. A bigger institution with an international will be less likely to kowtow to the banks when push comes to shove. And that wil be a Good Thing.

And thirdly, I would like to see less government influence on internal operations: I am very concerned about OSFI’s attempts to debase the bond indices and would have greater faith in bond indices prepared by a trans-national corporation.

Another day of mixed results for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets up 3bp and DeemeRetractibles getting smacked for a loss of 16bp. Volume was high.

The day started with rumours that some of the owners of Alpha Trading Systems don’t want big brother to get married:

Four of the country’s six largest banks are lining up to raise red flags about the planned merger of the parent companies of the Toronto Stock Exchange and the London Stock Exchange, saying the country risks losing clout as a financial centre.
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The banks plan to lay out their concerns this week in a public letter. The wording of the letter, tentatively titled “Let’s build on a Canadian success story,” has not been finalized, nor has the list of signatories, but sources said Tuesday that the banks that were on side as of then included Toronto-Dominion Bank, which is co-ordinating the effort, as well as Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada.

Hey, if you can’t compete, run home crying to mommy, that’s what I always say! Boyd Erman comments:

There’s no doubt that on some level, Alpha may be factoring into the calculations, but the web of conflicting behaviour suggests that Alpha is not the driving factor behind whether banks support or oppose the TMX-LSE deal.

The last argument is the old small-town one, that the banks would like to remain the big fish in a small pond. It may be that the banks are being parochial, and want to keep control of the TMX within walking distance of their own head offices. This one probably has the most weight.

How are you going to keep the boys on the farm, once they’ve seen the City? And the furrinners might not have the proper reverence for Canadian banks, or might send in their resumes once their regulatory stint is over. Another mouth to feed!

As it turns out the Financial Post has published the letter. It’s vagueness, incoherence and prediliction for sweeping fearmongery make it clear to me that whatever they’re talking about, it’s not the merits of the deal.

Bloomberg reports on today’s testimony to a parliamentry committee. Caldwell has a number of fish to fry with respect to exchange mergers, but had the right idea:

“Of course they’re against it because it provides real competition for Alpha,” said Brendan Caldwell, Chief Executive Officer of Caldwell Investment Management Ltd., a money manager that owns shares in TMX. “They banks don’t like real competition, they like the little oligopoly where they divvy up the financial pie of Canada amongst themselves. It’s quite incestuous.”

The Globe plays up support for the deal from the Toronto Financial Services Alliance. I confess I don’t know much about this group, but they repeat that hoary canard about the WEF ranking of banks around the world on the front page of their website, so their opinions can’t be worth much.

The Kansas City Financial Stress Index is at its lowest level since June 2007:

Click for big

Another mixed day in the Canadian preferred share market, with PerpetualDiscounts up 22bp, FixedResets gaining 3bp and DeemedRetractibles slipping 4bp. Only one entry – which barely made it – in the Performance Highlights table. Volume remained high.

PerpetualDiscounts now yield 5.64%, equivalent to 7.33% interest at the new standard equivalency factor of 1.3x. Long corporates now yield about 5.6% (ok, maybe a tiny bit less) so the pre-tax interest-equivalent spread is now about 175bp, a slight (and perhaps spurious) decline from the 180bp reported on March 2.

Alarms are sounding about a possible Chinese bank crisis:

China faces a 60 percent risk of a banking crisis by mid-2013 in the aftermath of record lending and surging property prices, according to a Fitch Ratings gauge.

The assessment is from a macro-prudential monitor used by the ratings company, Richard Fox, a London-based senior director, said in a phone interview on March 4.
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The indicator signaled crises in Iceland and Ireland and has been tested back to the 1980s, Fox said.
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The indicator’s failures have included not sounding an alarm about the banking system in Spain, he added.
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Banking systems in emerging markets are vulnerable to systemic stress when credit growth exceeds 15 percent annually over two years with real property prices rising more than 5 percent, according to Fitch. Credit growth in China averaged 18.6 percent annually over 2008 and 2009 as house prices jumped, according to the ratings company.

The fallout from China’s lending spree may be bad loans totaling $400 billion, according to Hong Kong-based advisory firm Asianomics Ltd.

Gloominess on Europe:

Some countries in the euro region may have their credit ratings cut further while a Greece debt default is a “possibility,” said Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s.

Asked if the worst was over for the region’s sovereign credit-rating outlook, Kraemer said: “I wish I could say yes, but the answer is no.”

“We still have a number of countries with a negative outlook or CreditWatch negative, indicating their credit ratings may be going down further,” Kraemer said in an interview in London. “Trigger points for that could be slippage in fiscal consolidation and structural reforms, but also decisions that will be taken at the European level later this month.”

S&P said on March 1 it kept Portugal’s A-long-term, A2 short-term and Greece’s BB+ long-term ratings on CreditWatch with a negative outlook. It cited Portugal’s “high external financing need and limited funding sources.” Moody’s Investors Service downgraded Greece’s government bond ratings yesterday to B1 from Ba1 , and assigned a negative outlook to the rating.

And more gloom on US mortgages:

Bank of America Corp. (BAC), the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst-performing “legacy” loans, said Terry Laughlin, who is running the new unit.
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The legacy portfolio will hold 6.7 million of loans with outstanding principal balance of about $1 trillion, according to a presentation to investors today. The split leaves home loan President Barbara Desoer with about half her previous portfolio, as well as new lending going forward.

Laughlin’s portfolio will include loans that are currently 60 or more days delinquent as well as riskier types of loans the bank no longer originates, such as subprime, Alt-A, interest- only and option adjustable-rate mortgages, he said. He said the portfolios will be completely split by March 31 and that his will be liquidated over time. Of the 13.9 million loans Bank of America services, about 3.5 million are held by the company on its balance sheet. The rest are owned by other investors.

There’s a rather odd perspective on the Charlie Sheen spectacle:

Second, he’s the talent. A hedge fund wouldn’t fire the star trader if he was a drug user or an alcoholic. It would have to get rid of half the staff if it did.

Which is why hedge funds blow up with such amazing regularity. I think it’s just sad: we have a guy who has achieved enormous success and can’t handle it. After pondering whether he was lucky or smart, he’s not just chosen “smart”, but gone beyond, into “completely irreplacable and personally indestructible.” It happens all the time, not just in Hollywood and Wall Street, but everywhere, sometimes with a definitions of “enormouse success” that most of us would consider “a good start”, causing an immense amount of pain and waste of talent.

If any employee of mine were ever to be found doing coke, he’d be out on his ass instantly, lawsuits and employer accomodation of addictions be damned. It’s cheaper in the end, as the Bishop said to the choir-boy.

Here’s some sense:

A top jurist has condemned plea bargaining as a form of coercion that tempts an intolerable number of innocent people into pleading guilty to avoid a harsh sentence.

Mr. Justice Marc Rosenberg of the Ontario Court of Appeal urged a thorough review of plea bargaining – a system that has become so entrenched in the past three decades that 90 per cent of criminal cases result in a guilty plea.

We can get rid of negotiated settlements in the securities industry while we’re at it.

Hats off to the Proceeds of Crime Act! Another way to build up slush funds like Brampton’s:

The Peel Police Services Board has bought tens of thousands of dollars worth of tickets to private mayoral galas in Brampton and Mississauga, using “proceeds of crime” that in Ontario typically go to victim and crime prevention programs.

The tickets were purchased over the years while Brampton Mayor Susan Fennell and a fundraising organizer of Mississauga Mayor Hazel McCallion sat on the board — and with the approval of Peel Region chair Emil Kolb, who also heads the police board.

Minutes show, for example, that the board approved buying a $4,000 table at Fennell’s gala on Feb. 20 last year, on Fennell’s invitation. A month before the gala took place, then-board member Jim Murray put forward a motion to buy a second table. It was approved.
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[Peel Region chair Emil] Kolb, who has chaired the police board since 1996, acknowledged that the board routinely approves such purchases, but points out that it’s not tax-generated dollars being spent.

“It’s funds that come from crime funds. Not one red cent is taxpayer dollars.”

Kolb should be fired – not just for reckless misuse of funds, but for general stupidity. Once it’s in the coffers, pal, it’s taxpayer’s money. Every goddam penny, regardless of whether it’s taxes, fees, fines, gifts or proceeds of crime. It’s not yours to do political favours for your buddies. Asshole.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 10bp, FixedResets flat and DeemedRetractibles gaining 16bp. Volatility was subdued with only one entry in the Performance Highlights table. Volume was heavy.

There are threats of inflation in Asia:

The Bank of Thailand and Bank of Korea will each raise key interest rates this week by a quarter percentage point, median estimates in Bloomberg News surveys of economists show. Malaysia may also be approaching the end of its pause in boosting borrowing costs, as four of 12 analysts polled see a March 11 move, the highest such share since the last increase, in July.
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The region’s economies are strong enough to withstand the impact of faster inflation, the Asian Development Bank said last week.

“The region is particularly prone to food and oil price shocks as a greater percentage of household income is spent on food and transportation,” said Vishnu Varathan, an economist in Singapore at Capital Economics (Asia) Pte.
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Diminished resistance to currency gains in China may have a knock-on effect throughout Asia as the continent’s biggest economy also seeks to contain price pressures. People’s Bank of China Governor Zhou Xiaochuan said last month in Paris that his nation may use means “including rates and currency” to curb increases in food and home prices.

WordPress.org was attacked by hackers in China recently. I wondered how one defends against this and found a paper by S S Nagamuthu Krishnan and Dr. V. Saravanan titled DDoS Defense Mechanism by applying stamps. Precious in places (‘Oh, do be a good netizen while munching your granola’) and, naturally enough, veering occasionally into jargon, but they do achieve one of their major objectives in the paper addressing a major problem:

This was a major event, covered in the major news media. They have done an excellent job in their coverage; as far as it has gone, their coverage has been accurate. The problem is, their coverage hasn’t been sufficiently detailed to explain why we cannot track down the people committing these attacks, and why we can’t defend against them. There’s a good reason for these omissions: the attack is subtle, and understanding how it works well enough to understand why we can’t cope today, and what will have to change before we can, requires a more detailed explanation of how the Internet is constructed than the mass media are prepared to deliver to their audiences.

It was a mixed day on the Canadian preferred share market, as PerpetualDiscounts gained 6bp, FixedResets lost 8bp and DeemedRetractibles were down 11bp. Volume was average, but there were some nice blocks changing hands – all courtesy of Nesbitt, which shut out the rest of the street on the Volume Highlights table.

The IMF has released the March 2011 edition of Finance and Development. There’s an article by André Meier titled Up or Down:

Some have predicted postcrisis deflation in advanced economies, others high inflation. Worries about either are probably exaggerated.
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Historical episodes of persistent large output gaps in advanced economies show a clear pattern of disinflation, supported by weak labor markets and low wage growth. However, declines in inflation appear to become more modest when the initial rate of inflation is already quite low, suggesting some combination of better-anchored inflation expectations and downward nominal rigidities, such as resistance to outright wage cuts. Moreover, fluctuations in oil prices and exchange rates can introduce significant shortterm volatility in inflation outturns.

Developments since the beginning of the global financial crisis are consistent with this pattern. Despite large swings in headline rates, underlying inflation in advanced economies has generally declined, with many core measures reaching the very low rates at which disinflation typically petered out during past [persistent large output gap] episodes. Thus, while upside inflation risks should be limited in countries facing continued economic slack, a slide into outright deflation does not seem very likely either.

There’s also a very hopeful article titled Healing Health Care Finances by Benedict Clements, David Coady, Baoping Shang, and Justin Tyson. Hey, here in Canada, no problem! You see, what we’re going to do is keep standards high but costs low through the use of a well-respected technique that has just been approved by an expert group of 23-year-old B.Comms with clipboards: Doing a shitty job. Whenever something goes wrong and this becomes public knowledge, just fire whoever was standing nearest. Works every time. How many voters really have any insights into the public health system, anyway?

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts down 21bp, FixedResets gaining 17bp and DeemedRetractibles losing 16bp. For all that, the market was relatively well behaved, with only one entry on the Performance Highlights table. Volume remained high.

The migration of traders continues:

Guggenheim Partners LLC, the closely held investment bank and asset manager, plans to hire as many as 150 staff being pushed out of banks’ proprietary-trading units because of U.S. financial rules enacted last year.

Loren M. Katzovitz and Patrick Hughes, 49-year-old managing partners who have worked together since 1993, are launching Guggenheim Global Trading LLC in Purchase, New York, with an initial investment of $500 million as soon as June 1, they said yesterday in an interview. The firm plans to hire 100 to 150 traders and manage as much as $2 billion, they said.

Much the same thing is happening in Canada:

The cultural gulf between Canada’s independent securities firms – with their eat-what-you-kill pay structures – and the more staid bank-owned investment dealers is steadily widening. Some of the people who recruit bankers and traders say that the result of a move to more deferred pay and smaller cash bonuses at bank-owned firms means they are attracting a more risk-averse type of person, which is what regulators were seeking.

The pay system at independent firms like GMP Securities remains simple. Bankers and traders get paid for the business they bring in. Base salaries are rare, but bonus payments are regular and in cash. Bonuses are big when business is good, and they can dry up in fallow times.

It will be interesting to see how this plays out. I can tell you that the quality of institutional bond desk personnel has declined over the past 15 years. There’s still lots of the old guys around, but as they retire and move on, they’re being replaced by order-takers.

General Growth, the object of Brookfield’s affections, is taking advantage of better tone in the CMBS market:

General Growth Properties Inc. (GGP), the U.S. mall owner planning to refinance $5 billion of mortgage debt, tapped UBS AG and Morgan Stanley (MS) to fund loans as banks rebuild inventory to back bonds tied to commercial real estate.

UBS agreed to provide a $375 million loan on the 977,000- square-foot Providence Place Mall in Rhode Island, according to a person with direct knowledge of the deal who declined to be identified because the talks are private. Morgan Stanley will lend about $150 million for a Humble, Texas property, according to a person familiar with those negotiations. The banks plan to package the loans for sale as securities, the people said.

General Growth, which emerged from the largest real estate bankruptcy in U.S. history in November after piling up $27 billion in debt, plans to refinance $5 billion in mortgages in 2011, Chief Executive Officer Sandeep Mathrani said during a March 1 conference call with analysts. Property owners nationwide are benefiting as the Federal Reserve keeps its benchmark interest rates near-zero to stimulate economic growth.
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General Growth buckled under its debt load when the market for commercial-mortgage backed bonds shut down in 2008 and the company was unable to refinance properties. The real estate investment trust has $18.2 billion in outstanding mortgage debt, Mathrani said.

A mixed, relatively quiet day on the Canadian preferred share market, as PerpetualDiscounts lost 5bp, FixedResets were down 7bp, and DeemedRetractibles gained 4bp. There are only two entries on the Performance Highlights table – and neither would have made had their closing bids been a penny lower. Volume remained at elevated levels.

DBRS has released a commentary titled Sovereign Ratings Provide a Benchmark for other DBRS Credit Ratings:

• Sovereign credit ratings serve as a general benchmark for all other DBRS credit ratings. DBRS uses a case-by-case approach when rating non-sovereign entities or transactions, and avoids using a static “sovereign ceiling” concept, because this would imply that ratings are capped at the sovereign rating. DBRS does not institute a maximum number of notches between the sovereign rating and non-sovereign ratings.
• Financial institution and corporate ratings are typically constrained by the sovereign rating, although both could have a higher credit rating that that of the central government, with the level of operations outside of the country of domicile typically being a key consideration. Structured Finance ratings are addressed on a case-by-case basis and in many instances can be higher than the sovereign rating.
• In certain cases, country risks, which do not necessarily result in sovereign rating changes, may also affect non-sovereign ratings.
• Within the Euro zone, non-sovereign ratings may enjoy a lower degree of influence from sovereign-related stresses, since there is far lower exchange rate risk, less regulatory risk and existing support mechanisms from European institutions.

It was a mixed day on the Canadian preferred share market, as PerpetualDiscounts were up 10bp, FixedResets gained 6bp, but DeemedRetractibles got knocked back for 16bp. Not much volatility, with only two issues on the Performance Highlight list. Volume was above average.

PerpetualDiscounts now yield 5.61%, equivalent to 7.28% at the now standard equivalency factor of 1.3x. Long Corporates now yield about 5.5%, so the pre-tax interest equivalent spread is now about 180bp. Given the change in the equivalency factor, this is not really comparable to prior figures; the raw data for February 23 was 5.61% for PerpetualDiscounts and 5.50 for Long Corporates, so the change is really zero.

The Federal Reserve Bank of New York has released a Staff Report by Olivier Armantier, Eric Ghysels, Asani Sarkar, and Jeffrey Shrader titled Stigma in Financial Markets: Evidence from Liquidity Auctions and Discount Window Borrowing during the Crisis:

We provide empirical evidence for the existence, magnitude, and economic impact of stigma associated with banks borrowing from the Federal Reserve’s discount window facility. We find that, during the height of the financial crisis, banks were willing to pay an average premium of at least 37 basis points (and 150 basis points after Lehman’s bankruptcy) to borrow from the Term Auction Facility rather than from the discount window. The incidence of stigma varied according to bank characteristics and market conditions. Finally, we find that discount window stigma is economically relevant since it increased banks’ borrowing costs during the crisis. Our results have important implications for the provision of liquidity by central banks.

Also released was a Staff Report by Maria Kasch and Asani Sarkar titled Comovement Revisited:

We find, unlike earlier studies, that there is no rise in the market betas of stocks that enter the S&P 500 index when the estimated factor model is that of Fama and French (1993). We also find that SMB and HML factor betas decline after the stocks are added to the index. This decline is explained by strong increases in earnings and in the market value of the event stocks in the period around―and, in particular, prior to―their inclusion in the index. We suggest that inclusions to the S&P 500 index are informative events that trigger a reassessment of the risk of newly added firms by drawing the broad market’s attention to their extraordinary growth in size and profitability.

It was a good day in the Canadian preferred share market, with PerpetualDiscounts up 16bp, FixedResets gaining 3bp and DeemedRetractibes winning 11bp. Above-average volume.